Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

I read over your article and I didn't really get it. You speak a lot in generalizations without mentioning specifics. For example, you write "there is nothing "natural" about shelling out a $500,000 mortgage to a family making less than $50,000 a year. The whole thing was absurd, and anyone stepping back and taking a hard look would realize it. So how did it happen? It was very clear that the speaker was not interested in that question." But you yourself never answer the question. My understanding was the runaway mortgage industry was caused by a series of laws passed in 2003 that loosened regulations on the banking industry. You also criticize the use of core inflation rather than net inflation as a measure of inflation, yet my understanding is that, until recently, core inflation was the standard measure of inflation, and that commodity prices are too volatile to be a measure of inflation. As evidence that commodity process are too volatile to be used as a measure, they price of gas and food dropped sharply last week, does this mean you are no longer worried about inflation?

Also, you extol the virtues of Rothbart and insist that the government should follow his recommendations to get us out of the crisis, but you don't mention one specific policy that he would recommend. When Krugman discusses Keynes, he at least offers specific applications of Keynes' theories to the present day.

Anyway, in general you have a lot of mocking words for the economists at the fed, but you don't really offer any specific criticisms or alternative policies. If you want to offer real critique of the way the government is handling the crisis, you'll have to be more specific.

"there is nothing "natural" about shelling out a $500,000 mortgage to a family making less than $50,000 a year."

What would you like him to explain about that? I'm no economist but I do live in reality. Making loans to people who can't afford them shouldn't really need more explanation right? The bottom line is that without the government promising to bail everyone out (FDIC), forcing banks to loan to people unable to pay them back (Community Reinvestment Act) and other means of encouraging moral hazard no lender in their right mind would issue credit like this. Of course the banks knew the odds were on their side and that they would be bailed out (which they were). How else would you explain it?

Also you mention 'your understanding' twice but aren't specific about where that understanding comes from. You want specifics but provide none of your own.

And gas dropped sharply last week? The price going down by a penny or two when a few weeks before that it shot up by at least 10 cents in one or two days is what you are calling a sharp drop? And my food bill is higher than ever.

Please shed more light so I can work on MY understanding because I just don't understand your comment (or perspective).

@Eric I forgot to mention Fannie and Freddie also being part of the moral hazard. When I got my home loan not only did they (lenders) say that if Freddie or Fannie approve it then I was pretty much guaranteed I also had realtors knowingly trying to set me up with horrible ARMs but they also just glossed over it. "Oh don't worry, all you have to do is refinance before the rates adjust.".

Well its a good thing I did some homework and went with a fixed rate instead. Of course my house has lost over half of its value since then but I don't get bailed out. I just have to live with a huge payment each month knowing that if I will probably never get to sell the house for even close to what I bought it for. Which of course means I am stuck where I live for a very long time (unless the money tree somehow favors me and I can just double my spending cash and buy a new house). But then I am a private citizen and not a bank.

When I was mentioning "making loans to people who can't afford them" being a result of the deregulation of the financial industry, I was referring to the passing of the Gramm–Leach–Bliley Act (which was in 1999, not 2003, my mistake) which allowed financial institutions that are covered by federal guarantees to make investments that are riskier than they are normally allowed to. This deregulation was the primary cause of the financial crisis. You could argue that if there were no federal guarantees the risk of collapse would prevent banks from making risky loans, but there were no federal guarantees or regulations preceding the great depression, and that didn't stop the financial institiutions of the time from making risky investments. After the great depression, both guarantees and regulations were put in place, and there were no major banking crises until the 80's. Once we hit the 80's, the government began removing regulations to various sectors, and each time it did so there was a corresponding boom/bust cycle in that sector. The pattern seems pretty clear; when the financial industry is not regulated by the government, they make risky and ultimately self- destructive financial decision.

The community reinvestment act is often held up as the cause of the financial crisis, but the CRI had largely ceased operations by 2002, long before the big run up of the real estate bubble.

I wasn't claiming that the CRI was the only cause but an example of the types of things the government has done to lead up to the current problems.

There was (and still is) government meddling though and it is very seldom that government does something with good intentions for the public. Maybe they removed regulations but for whom? They also did things like the J. Aron letter to Goldman and 16 other entities which basically allowed them to act as hedgers VS acting as speculators. I'm not saying end all government necessarily but I believe that the meddling is a large part of the problem.

Also, the biggest 'meddle' that I can see in our current times is the TARP and all the bailouts (not to mention the non-stop spending). If they had just let the banks fail and gotten their just rewards I don't think that the removal of regulations would have gotten us to where we are.

Blogger.com was shut down for the last few days and finally came back on. Maybe they were working on the lost comments problem (or maybe they weren't). I've seen chats about other folks losing comments on blogger.com.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).